The modern warehouse offers much more than basic storage. It’s home base for sophisticated eCommerce operations, high-velocity retail distribution, vendor managed inventory, and a variety of other services. While you can build and staff your own warehouse and perform these services yourself, more and more companies see the value in handing warehousing operations off to a third-party logistics (3PL) provider.
In this article, we’ll examine all that 3PL warehousing entails, while helping you find a 3PL partner that’s right for your business.
Types of 3PL Warehousing
There are three basic types of warehousing available to you.
- The DIY method. Your most expensive option, you can choose to simply go it alone and build or rent a warehouse yourself. From there, you’ll need to staff it, pay for the equipment, the warehouse management system and other technologies. If your actual volumes don’t match your forecasts, you can be left paying a lot of money for resources you’re not using – or scrambling to add resources to keep up.
- The dedicated 3PL model. With this option – known as dedicated or contract warehousing – you pay a 3PL to fully dedicate one (or more) of its warehouses to your operation. Or, you can lease the facility(s) yourself and hire a 3PL provider to run your operations. In either case, your 3PL can provide the staff, equipment and systems needed – saving you significant amounts of time and money and acquiring these yourself. This type of warehousing is suited for larger companies with predictable (and sizeable) order volumes.
- The shared 3PL model. The most common form of modern warehousing, shared warehousing enables you to share space in a 3PL’s warehouse alongside other “tenants.” Instead of the large overhead associated with the DIY and contract warehouse models, you simply pay only for the space and services you require. Your 3PL can accommodate any shifts in space or resource requirements – effectively scaling your footprint to your needs as they change over time.
The Warehouse Management System
No matter which warehousing model your company uses, the cornerstone of your warehousing and distribution operations will be the facility’s warehouse management system (WMS) – a robust software application that supports nearly every warehouse function. Common WMS capabilities include:
- Inventory management: The WMS will record and manage your products according to key characteristics like warehouse location, available quantity, pallet ID, serial number, lot number, and expiration date.
- Order status: As orders are received, their shipment status and parcel tracking information can be viewed in real-time.
- Multi–channel capabilities: The WMS can manage inventory and orders related to both B2B and B2C simultaneously.
- eCommerce pick and pack: The WMS can design the most effective picking pattern so that associates reduce walking distance and overlap, and therefore minimize labor costs. Associates then follow the packing instructions generated by the WMS and affix shipping labels (also generated by the WMS).
- Label generation: eCommerce orders will trigger the creation and printing of shipping labels, while retailer orders will trigger UCC-128 labels and others that comply with individual retailer specifications.
- Integrations support: The WMS can integrate and communicate with other platforms via EDI. These include transportation management systems (TMS); eCommerce platforms such as Amazon, Shopify and Magento; and carrier portals (e.g., FedEx, USPS and UPS) for real-time shipping updates.
- Recall capabilities: In the event of a product recall, the WMS will assign the flagged items to a segregated hold location and prevent them from being distributed.
- Just-in-time capabilities: If a 3PL stores raw materials for a manufacturer, it will be notified by the WMS whenever an order is placed requiring those materials. The 3PL can then immediately supply the manufacturer so that the final product can be produced.
- Custom reporting: From standard stock reports to fully customized KPIs that matter most to your stakeholders, the 3PL WMS can give you the reports you need.
If you were to invest in your own WMS system, you can spend well into 6-figure territory. When you partner with a 3PL for warehousing, however, you can simply plug your systems into that provider’s WMS – while footing the bill for only the services you use. Some 3PLs do not charge customers for WMS usage and instead only bill for related services (e.g., pick and pack).
Multi-channel distribution from the 3PL warehouse
Many 3PLs will be able perform both B2B and B2C/eCommerce distribution. However, efficient pick and pack warehousing for B2C fulfillment requires a very different approach to product storage, picking, packing and transportation. You’ll want to work with an experienced partner.
As stated above, your 3PL’s WMS will integrate with your chosen eCommerce platform. As orders come into the WMS, the system will share order details and item locations with associates, prepare shipping labels, and schedule shipment with the 3PL’s chosen carrier. Products can then be picked and packed, labels affixed, and final QA will be performed prior to shipping.
As with B2C distribution, orders from retailers and other B2B customers will feed into the 3PL’s WMS. The system will then create UCC-128 labels and additional labels specific to your customer. From there, the 3PL will coordinate the outbound shipment – either with its internal transportation arm or with an external provider.
Value-added warehousing services
In addition to storage, inventory management, order management, and distribution, the 3PL warehouse can be home to a variety of additional services known as “value-added services.” Such services can include:
Product rework. Let’s say you have an imported shipment of a product that needs to be repackaged or reconfigured (e.g., a part or instruction manual needs to be replaced with a new one). You can ship it back to its origin for these services – taking substantial hits to your wallet and product turn time in the process. Or, you can save time and money by working with a 3PL that can perform these services quickly and cost-effectively without your product ever leaving the warehouse.
Vendor-managed inventory (VMI). With the VMI model, manufacturing suppliers work with 3PLs to store goods that the manufacturer will eventually require. Once the materials are needed, the 3PL performs just in time (JIT) delivery to the manufacturer. This benefits the manufacturer, who only pays for – and takes physical ownership of – materials when they are needed. Its production space, therefore, isn’t cluttered by boxes of inventory and it doesn’t have to pay upfront for high volumes of materials that won’t be needed right away.
Cross docking. With cross docking, goods are delivered to a 3PL loading dock for temporary storage or direct transfer to another truck. The time and costs of long-term warehousing are skipped, while distribution can continue with minimal interruption.
Kitting. Typically, with a manufacturing service, kitting services involve the assembly of components into a ‘kit’ that can be delivered directly to the manufacturing line. Examples range from custom trays that contain nuts, bolts and screws to be used in production to the assembly of one part of a larger product.
Foreign trade zone (FTZ). Located in or near U.S. ports, some warehouses legally act as foreign trade zones that are under U.S. Customs and Border Protection (CBP) supervision, though considered outside of CBP territory. Merchandise may enter the U.S. via an FTZ without a formal customs entry, without payment of customs duties or excise taxes, and without a thorough examination. Duties and taxes are not paid until the product enters the U.S. marketplace for consumption.
How much does outsourced warehousing cost?
As we’re dealing with big facilities with big capabilities and big equipment, you might expect that 3PL warehousing will come with a big price tag. That’s not necessarily the case. With contract warehousing, yes, there is a substantial financial commitment required, but it is often far less expensive than going it alone – while putting much less strain on your resources.
With shared warehousing, the costs are typically very palatable as, again, you’re only paying for the space and services you use.
Ultimately, of course, warehousing costs are largely individual. Just about every 3PL will have a standard rate for the square footage you require, but square footage is only part of the story. You will need to provide your 3PL with greater detail about your products so that they can determine the services and type of space needed in order to provide you with an accurate quote.
The following are examples of storage and handling information your 3PL will need from you to determine precise costs.
- Average pallet dimensions (height, width, weight, depth)?
- Pallet characteristics (e.g., stackable or racking)
- Average inventory (in terms of number of pallets)
- Number of cases per pallet
- Inventory turns per year
- Number of shipments per year
- Estimated inventory value
- Product temperature requirements
- Hazardous material information
- Preferred billing unit (i.e. case, cwt, line item, etc.)
- Number of orders processed annually (B2B and B2C)
- Average order size (pallets if B2B, pieces if B2C)
- Pick and pack requirements (for eCommerce fulfillment)
- Average number of inbound orders per day
- Average number of outbound shipments per day
- Percentage of cross dock shipments
- Stock rotation protocol (e.g., FIFO, Date code, Lot code, Random code, customer select code, etc.)
- Transportation requirements
- Parcel requirements
- Intermodal and container details/requirements
3PL contracts and responsibilities
Before you sign on the dotted line for warehousing and distribution services, you should make sure you clearly understand where your 3PL’s responsibilities end in terms of liability – and where yours begin.
What is the 3PL provider responsible for?
In the logistics industry, most 3PL warehousing providers are fully responsible for their buildings, equipment, and people. This is standard practice in line with guidelines set by the International Warehouse Logistics Association (IWLA). So, if a hurricane peels back part of the roof, it’s the 3PL’s responsibility to fix it and relocate products as repair occurs. The same goes for a broken forklift or an injured associate – it is the 3PL provider’s responsibility to take care of these things in order to perform services as it is contracted to do.
The 3PL provider is also responsible for rectifying any errors that it makes. Examples include:
- Shipping the wrong product. If a wrong product is shipped, the 3PL will ship out the correct product and obtain and return the incorrectly shipped product back to inventory.
- Incorrect loading of product resulting in damage. If the 3PL’s associates do not load products correctly for transportation and damage occurs, the 3PL may be liable according to the parameters of the contract. Conversely, if damage occurs after products have been loaded correctly and signed for by the driver, then the 3PL will not be responsible for product damage.
- Incorrect handling of product resulting in damage. If product is damaged during handling (e.g., placing or removing products on/from the racks), then the 3PL will be responsible within the parameters of the contract.
When it comes to products, however, the 3PL is not responsible for damage due to “acts of God” (e.g., that hurricane mentioned earlier) and will typically have limited liability coverage for all other types of product damage, the exact parameters of which will be clearly defined in your contract. In most cases, the 3PL is financially liable for product damage or disrepair up to a certain (limited) amount. The bulk of the liability will be owned by the customer and its insurance coverage.
What is a 3PL customer responsible for?
In most 3PL relationships, the 3PL customer is responsible for its own products. Yes, the customer is placing its products in the care of the 3PL provider, and the provider must do all that is reasonable to protect those products, but the products are ultimately the responsibility of their owner.
If damage occurs, the 3PL provider’s insurance will typically cover a portion of the cost (limited liability) and the customer’s insurance will cover most of the replacement cost. To have product replacement insurance apply to goods being warehoused by a 3PL, the customer simply needs to take out a rider listing the 3PL facility as a storage facility. In some cases, the 3PL may add the products to its own insurance and bill the customer accordingly.
When it comes to creating a contract with your 3PL, it is important to remember two things:
- The contract should cover liability for every conceivable occurrence. If it can happen, it should be included in the contract. For example, if a hurricane does peel the roof of a section of the warehouse and it rains directly onto products for two days, what happens? Who’s responsible for what – and to what extent? That information should be built into the contract.
- Everything is negotiable. If you have things that you are adamant about in terms of liability, speak up at the beginning. While there are standards and guidelines for warehousing contracts, adjustments and negotiation are always possible. The important thing is to get it all in writing at the outset and avoid uncertainty and finger pointing down the road.
What to look for in a 3PL warehousing provider
With all this warehousing knowledge now at your disposal, it’s time to find your 3PL provider. Your vetting process should start with the basics:
- Tour the warehouse of a prospective 3PL partner to assess its cleanliness, environmental characteristics, organization and safety conditions.
- Interview warehouse management to determine if/how the 3PL’s capabilities can meet your product and operational requirements. You’ll also want to get a sense that your operation is not too big for the 3PL’s capabilities, nor too small to receive the attention you deserve.
- Interview warehouse associates to see how knowledgeable they are about the product requirements of the items they handle.
From there, you should look for characteristics that separate one 3PL from the rest of the pack. Two areas that should be of interest are continuous improvement and KPI management.
For most companies, it is important that their 3PL partner has a documented continuous improvement program (CIP) in place. Such a program seeks to improve operations, prevent non-conformities and ensure that errors, should they occur, are never repeated. Here are 7 questions you can ask prospective providers to see if they have such a program.
- Do you have a continuous improvement program? If you receive a blank stare in response, it may be a good time to walk away. If, however, the 3PL does have a CIP, a good follow up question is…
- Are you ISO-9001 certified? While not every company that has a CIP will be ISO-9001-certified, every ISO-9001-certified company will have a CIP. ISO-9001 is one of the standards developed by the International Organization for Standardization (ISO). Companies who are certified in the ISO-9001 standard have demonstrated a commitment to quality that goes far beyond lip service.
- Can we audit your processes? For some companies, especially those within the food and pharmaceutical industries, it’s not enough to know that a 3PL provider has a CIP – they’ll want to audit the CIP to ensure that it is compatible and up to their standards. This is a relatively common request and your prospective partner should have no problem sharing this information with you.
- How do you handle recalls? Depending on your company’s product and service offerings, recalls may be a very big deal to your operation. If so, you’ll want to understand your prospective 3PL’s processes for identifying, separating, and holding products should they be recalled. Many 3PL providers also conduct regular mock recalls to boost preparedness in the event of a real recall.
- What is your process for handling damaged or non-conforming products? Like recall preparation, the CIP should include the 3PL’s methods of handling non-conformities. For instance, it should detail the processes – and where responsibilities lie – if products arrive damaged at the warehouse or at the consignee location. You’ll want to understand what the corrective action(s) is and how it is implemented.
- What is your process for addressing service errors? While every 3PL strives for perfection, the fact is that errors can and will occur. The key is to ensure that they are not repeated. For the services you have outsourced, the 3PL’s CIP should detail the corrective actions that will take place if those services are not performed optimally/as agreed upon.
- What is your associate training program? While documented policies, processes and procedures can go a long way in establishing a comfort level between you and your 3PL partner, they don’t mean much if they are not actionable. With this in mind, you need to understand the training regimens established for the associates who will support your business.
Warehouse KPI management
When you contract with a 3PL for warehousing and distribution, you’re entrusting key components of your supply chain to an expert that can perform these services at a high level. Key performance indicators (KPIs) are the metrics that help you to understand just how well your 3PL is performing.
Your 3PL should be have KPI measurements for its other customers and be perfectly willing to establish KPIs for your operation.
According to Armstrong and Associates, the following metrics are most commonly assessed in 3PL warehousing (the percentages in parentheses denote the common target range across the 3PL industry).
- On-Time Shipments (industry target range: 95.00 – 100%)
- Order Picking Accuracy (99.00 – 100%)
- Average Warehouse Capacity Used (80.00 – 95.00%)
- On-Time Ready to Ship (99.50 – 99.90%)
- Annual Workforce Turnover (2.00 – 15.00%)
- Fill Rate – Lines Filled (98.50 – 100%)
- Inventory Count Accuracy (99.50 – 100%)
- Order Fill Rate (95.00 – 100%)
These are just the KPIs that are most common across the warehousing and logistics space. The KPIs you establish with your 3PL can and should be based on the metrics most important to your business.
Importantly, these KPIs should be established with your 3PL at the outset of the relationship. Each metric must also have a target or goal which denotes success (e.g., 99.5% on-time shipments). If/when your 3PL provider falls short of the mark with any given metric, you’ll want to have confidence in its ability to identify the root cause and to establish corrective measures to improve performance.
If you’re feeling overwhelmed or would just like to have an exploratory chat with a real-life 3PL provider, there are many to choose from all across the country. Kanban Logistics is an Eastern North Carolina 3PL provider that offers warehousing and other logistics services in the mid-Atlantic. We’re always happy to talk warehousing, so feel free to contact us anytime.